FHA Student Loan Guidelines: What You Need to Know

If you have student loan debt and want a home loan, your debt-to-income ratio (DTI) will be considered by mortgage lenders. How student loans are treated in a home purchase varies based on the lender and mortgage program. Depending on the outstanding student loan balance, it could be prohibitive for home buyers. 

But there’s some good news — as of June 2021, the Federal Housing Administration (FHA) made changes to its FHA student loan guidelines. They essentially relax certain requirements, making it easier for student loan borrowers to get an FHA loan. 

Although the FHA doesn’t offer mortgage loans directly, it insures its loans. This guarantee lessens the risk for lenders and provides borrowers with lower down payment and credit score requirements. 

FHA student loan guidelines for eligibility

Getting an FHA loan can be an attractive option, thanks to its minimum 3.5% down payment requirement, for qualified borrowers. Plus, applicants typically need a credit score of 580 (as low as 500 in some cases). This opens up possibilities for homeownership for a lot of people. 

However, in the past, student loan borrowers could be at the mercy of the 1% rule by lenders. This meant that lenders could use the payment on the borrower’s credit report or 1% of the loan balance as part of its debt-to-income calculation, whichever was greater. If you owe $120,000 in student loans, your payment might be $1,200 as part of this calculation. But if you’re on an income-driven repayment plan that lowers your monthly payment significantly, this approach might hurt your approval odds. 

But new FHA student loan guidelines announced in June 2021 changed that. Now, any outstanding student loan balance, no matter what the payment status, would be one of the following:

• The student loan payment listed on the borrower’s credit report or documented payment (when the monthly payment exceeds $0), or 
• 0.5% of the current outstanding student loan balance if the monthly payment shows $0 on the borrower’s credit report. 

This might be beneficial if you’re applying for an FHA loan but want the lender to use a more accurate representation of your student loan payments. 

Student loan repayment status and its impact on FHA mortgage applications

According to FHA student loan guidelines, student loans must be considered when calculating your DTI, no matter the status of repayment or repayment plan. 

Typically your regular monthly payment would be included if you’re in current repayment. But if you’re currently in deferment or forbearance or — in some instances — an income-driven repayment plan,  for example, you might have a $0 payment. This might also be the case with the COVID forbearance. 

If your required payment is $0, as part of the new FHA student loan guidelines, 0.5% of the loan balance will be used toward the calculation. This is cut in half from what it was before. 

For mortgage application purposes, this results in a higher payment as part of your DTI ratio than what you’re actually paying — or, in this case, not paying. Depending on other debt obligations, this could affect mortgage eligibility. Additionally, you’re ineligible for an FHA loan if your student loans are in default. 

Understanding debt-to-income ratio and its significance in FHA mortgage applications

Your debt-to-income ratio is used as part of FHA mortgage applications. Your DTI ratio refers to your total debt payments each month divided by your total monthly income. 

If your income is $5,000 per month and your total debt monthly obligations are $1,000, then your DTI would be 20% ($1,000/$5,000). 

For FHA eligibility, your DTI would need to include your prospective mortgage payment and be 43% or lower. That means in this hypothetical scenario, you could take a mortgage with a payment of roughly $1,100 per month. 

$1,100 (mortgage payment) + $1,000 (debt obligations) = $2,100
$2,100/$5,000 (income) = 0.42 X 100 = 42%

If your DTI is hindering your eligibility, consider paying down your student loan balance or getting out of deferment or forbearance, so your actual payment is used and not the 0.5% metric. 

Student debt documentation requirements when applying for an FHA mortgage

Your lender might request some additional documentation regarding your student loan debt to process your FHA loan application. 

According to the Mortgagee Letter 2021-13, if the monthly payment used ends up being less than what’s reported on your credit report, you’ll need written documentation to prove the loan amount, monthly payment, status and repayment term. This information can come from your loan servicer. 

Contact your current loan servicer, which is the entity that manages your student loan repayment, to request this information. 

Also note that your monthly payment can be excluded if your loan servicer can show that the loan has been forgiven or paid off completely. 

If you’ve had your loans discharged through Public Service Loan Forgiveness (PSLF) or another forgiveness program, this shouldn’t contribute to your DTI calculation. Having a forgiven or discharged student loan account omitted from your DTI might boost your approval odds. 

How FHA lenders treat federal student loans vs. private student loans

The Federal Housing Administration works with the U.S. Department of Housing and Urban Development (HUD) and offers FHA loans. 

In general, your federal loans and private student loans are treated the same when it comes to impacting your debt-to-income ratio. The same metrics used above are in place when determining which payment to use as part of the calculation. 

One interesting differentiation is with loans in default. Since the FHA is part of a federal government entity, defaulted federal loans make you ineligible. Lenders are required to check potential borrowers against the Credit Alert Verification Reporting System — a public record of borrowers with delinquent federal debt, including defaulted federal loans. 

Private student loans in default don’t have a similar system to check. However, that doesn’t mean you’re off the hook. Your payment might show up in your credit report, or your credit score might have taken a substantial hit, therefore affecting your eligibility in another way. 

For either situation, make moves to get out of default so you can be in good standing and not have it determine whether you’re eligible for FHA home financing. 

FHA loan alternatives

Getting an FHA loan can be a good way to get a mortgage with a lower down payment starting at just 3.5%. But if you want to consider all your options, there are some FHA loan alternatives. 

• Conventional loan. This type of loan isn’t backed by the government like FHA loans are and typically requires you to put 20% as a down payment or pay private mortgage insurance (PMI). 
• Physician mortgage loan programs. If you’re a doctor or healthcare worker, you might qualify for special doctor mortgage loans that can come with generous benefits like little to no down payment. 
• VA loan. If you’re a veteran or service member, you might qualify for a VA loan that’s backed by the Department of Veterans Affairs. 

The bottom line on FHA student loan guidelines

If you want to purchase real estate but have student loans, you have more options now with the new FHA student loan guidelines. Make sure you’re comfortable with a prospective mortgage payment and meet your lender’s underwriting criteria. 
An FHA home loan can be a good option as it might fast-track your ability to buy a home with low down payment requirements and other benefits. Have questions about your student loans and applying for a mortgage? Contact a Student Loan Planner consultant today.